Mexico - Financial sector assessment program : technical note - housing finance (English)

Housing needs are high in Mexico despite quantitative progress in the last 10 years.Global data hide mismatches between housing demand and supply. First, urban growth relied for a long time on a pattern of urban sprawl, with mass-scale developments of...  See More + Housing needs are high in Mexico despite quantitative progress in the last 10 years.Global data hide mismatches between housing demand and supply. First, urban growth relied for a long time on a pattern of urban sprawl, with mass-scale developments of individual units were built outside cities where land is affordable, but far from jobs and services and with related high transportation cost.Second, the housing shortage affects some household categories more than others.The housing finance system has been contributing to these mismatches.The way the two housing provident funds that dominate the mortgage market used to function was an inducement to the urban sprawl pattern. On the supply side, they were acting as demand aggregators for developers, warrantying that projects would meet the effective demand of purchasers qualified to borrow mortgage loans, and would thus avoid market risk largely irrespective of the location of the projects. On the demand side, households were incentivized to take out loans at below market conditions to which they were entitled once in their lifetime.The new policy was outlined in February 2013, and two national 2014-2018 Programs for Urban development and Housing were approved in 2014.Housing finance has a critical role to play to support a more balanced urban development and to help improve living conditions.The growth of the market size despite the stability of the number of loans suggests that better, higher priced housing has become affordable to more households.The improvement of lending conditions also increased the affordability of finance.The macro-economic context allowed the desindexation of housing finance, a major change relatively to the 20-year period delimited by two financial crises. The mortgage Sofoles /Sofomes sector largely disappeared following the 2008-2009 financial crisis.An amendment to the General Law of Credit and Auxiliary Organizations and Activities removed the category of Sofol.SHF reoriented its activities following the demise of the Sofoles/Sofomes, without a totally clear systemic justification in some cases.On the primary market, since the disappearance of most of the sector, SHF only refinanced new mortgages for only MXN 5.3 billion in 2015 (out of about MXN 300 billion total originations).This growth has been partially driven by changes in the market structure. Two factors have played a special role in this growth: (i) the demise of Sofoles/Sofomes, since several of them were bought by banks and are now consolidated with them; (ii) the success of the lending in partnership with the Institutes. In addition, several new comers entered the mortgage market in the last 10 years, including Inmobiliaro Mexicano or ABC Capital. Still, the overall market development is largely due to the growth strategy of three lenders. These entities face several obstacles: (i) gaps that still exist in the property rights (persisting ejido land tenure for instance) and registration systems in the geographic areas – small cities, rural areas- where these institutions are active, which prevent them from securing loans as would be required by long term credit; (ii) regulatory maturity restrictions: up to 5 and 8 years for SOCAPS and Sofipos of categories I and II respectively. These limits are however lifted if housing loans are funded by SHF, the case for only a minority of institutions; (iv) insufficient operational capacities to lend medium or long term loans for housing; and (v) long term funding.  See Less -